Fair Value Measurements

9 Months Ended

Feb. 28, 2013

Fair Value Measurements

NOTE 7 — FAIR VALUE MEASUREMENTS

Financial instruments recorded on the balance sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.

An allowance for anticipated uncollectible trade receivable amounts is established using a combination of specifically identified accounts to be reserved, and a reserve covering trends in collectibility. These estimates are based on an analysis of trends in collectability and past experience, but are primarily made up of individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm uncollectibility.

All derivative instruments are recognized on our Consolidated Balance Sheet and measured at fair value. Changes in the fair values of derivative instruments that do not qualify as hedges and/or any ineffective portion of hedges are recognized as a gain or (loss) in our Consolidated Statement of Income in the current period. Changes in the fair value of derivative instruments used effectively as cash flow hedges are recognized in other comprehensive income (loss), along with the change in the value of the hedged item. We do not hold or issue derivative instruments for speculative purposes.

The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:

Level 1 Inputs — Quoted prices for identical instruments in active markets.

Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs — Instruments with primarily unobservable value drivers.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Fair Value at February 28, 2013
U.S. Treasury and other government	$	—	$	21,038		$	—	$	21,038
Foreign bonds				42					42
Mortgage-backed securities				174					174
Corporate bonds				1,996					1,996
Stocks — foreign		1,375							1,375
Stocks — domestic		32,097							32,097
Mutual funds — foreign				24,927					24,927
Mutual funds — domestic				24,409					24,409
Foreign currency forward contract				(8,648	)				(8,648	)
Cross-currency swap				(10,949	)				(10,949	)
Investment in Kemrock convertible debt				11,611					11,611
Total	$	33,472	$	64,600		$	—	$	98,072
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level  1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Fair Value at May 31, 2012
U.S. Treasury and other government	$	—	$	19,865		$	—	$	19,865
Foreign bonds				39					39
Mortgage-backed securities				344					344
Corporate bonds				2,649					2,649
Stocks — foreign		1,095							1,095
Stocks — domestic		26,110							26,110
Mutual funds — foreign				17,074					17,074
Mutual funds — domestic				39,283					39,283
Foreign currency forward contract				(1,356	)				(1,356	)
Cross-currency swap				(2,159	)				(2,159	)
Conversion option, Kemrock 5.5% bonds							9,031		9,031
Investment in Kemrock convertible debt				13,670					13,670
Total	$	27,205	$	89,409		$	9,031	$	125,645

Our marketable securities are composed of mainly available-for-sale securities, and are valued using a market approach based on quoted market prices for identical instruments. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For most of our financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

Our cross-currency swap is a liability that has a fair value of $10.9 million at February 28, 2013, that was originally designed to fix our interest and principal payments in euros for the life of our unsecured 6.70% senior notes due November 1, 2015, which resulted in an effective euro fixed-rate borrowing of 5.31%. The basis for determining the rates for this swap included three legs at the inception of the agreement: the U.S. dollar (USD) fixed rate to a USD floating rate; the euro floating to euro fixed rate; and the dollar to euro basis fixed rate at inception. Therefore, we essentially exchanged fixed payments denominated in USD for fixed payments denominated in euros, paying fixed euros at 5.31% and receiving fixed USD at 6.70%. The ultimate payments are based on the notional principal amounts of 150 million USD and approximately 125 million euros. There will be an exchange of the notional amounts at maturity. The rates included in this swap are based upon observable market data, but are not quoted market prices, and therefore, the cross-currency swap is considered a Level 2 liability on the fair value hierarchy. Additionally, this cross-currency swap has been designated as a hedging instrument, and is classified as other long-term liabilities in our Consolidated Balance Sheets.

Our investment in Kemrock 5.5% convertible bonds includes the fair value of the conversion option feature as of the balance sheet date, and is classified in other long-term assets in our Consolidated Balance Sheet. During the first half of fiscal 2013, we recognized a loss of approximately $9.0 million, resulting from the decline in the fair value of the conversion option feature associated with the bond, driven primarily from the decline in the market value of Kemrock common stock, from 531.0 rupees per share at May 31, 2012 to 56.70 rupees per share at November 30, 2012. The majority of the decline in the market value of Kemrock shares began to occur during the month of August 2012. This amount is reflected in other expense (income) in the Consolidated Statements of Income.

The carrying value of our current financial instruments, which include cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable and short-term debt approximates fair value because of the short-term maturity of these financial instruments. At February 28, 2013 and May 31, 2012, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are considered to be Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of February 28, 2013 and May 31, 2012 are as follows:

	At February 28, 2013
(In thousands)	Carrying Value		Fair Value
Cash and cash equivalents	$	247,104	$	247,104
Marketable equity securities		82,808		82,808
Marketable debt securities		34,861		34,861
Long-term debt, including current portion		1,395,938		1,541,185

	At May 31, 2012
(In thousands)	Carrying Value		Fair Value
Cash and cash equivalents	$	315,968	$	315,968
Marketable equity securities		83,562		83,562
Marketable debt securities		36,567		36,567
Long-term debt, including current portion		1,115,536		1,232,180